Doesn't algorithmic trading simply smooth out price fluctuations to the point that individual traders receive nothing, while HFT houses skim immense numbers of tiny slivers?
Yes. Good speculation smooths out price fluctuations to the point that bad speculators receive nothing, while good speculators receive all the alpha. This is true not only of HFT, but of any good strategy.
...claims of HFT value are heavily undermined by their tendency to drop out of the market during crashes.
If you don't want HFT and other speculators to drop out of the market during crashes, don't break trades after the fact.
During a crash, most HFT's should make money hand over fist. But if the market centers break trades, HFT's are in danger of stabilizing the market and being heavily penalized for it.
I.e., if an HFT pushes accenture up from $0.05 to $1.00 and sells at $35, following which accenture eventually goes up to $40, they run the risk of having their $1.00 buy trade broken. Then they are stuck with a short sale at $35, while the price of accenture went up to $40.
> I.e., if an HFT pushes accenture up from $0.05 to $1.00 and sells at $35, following which accenture eventually goes up to $40, they run the risk of having their $1.00 buy trade broken. Then they are stuck with a short sale at $35, while the price of accenture went up to $40.
Shouldn't both trades be broken, though? Breaking just one sounds like the kind of behaviour that would be a strong disincentive to trade at all in the first place.
Under current market rules, no. Besides, this would quickly become a combinatorial disaster. Think of your counterparty who bought at $35 and sold at $36 - now one leg of his trade gets broken, and he has a short position. Or maybe we break both of his trades? Where does the chain end?
And of course, this still hurts people doing stat arb. If you want to go long accenture, short IBM, and your accenture trade is broken, you find yourself with an unhedged IBM short.
Breaking just one sounds like the kind of behaviour that would be a strong disincentive to trade at all in the first place.
This is why HFT's pull out of the market under circumstances where broken trades become likely. Most of the HFT's that stayed in the market during the flash crash made huge money - volatility rocks.
Thanks, thats interesting. It seems unfair to use the HFT to create stability, and then penalize it for that. I suppose that can't be fixed easily, though.
Yes. Good speculation smooths out price fluctuations to the point that bad speculators receive nothing, while good speculators receive all the alpha. This is true not only of HFT, but of any good strategy.
...claims of HFT value are heavily undermined by their tendency to drop out of the market during crashes.
If you don't want HFT and other speculators to drop out of the market during crashes, don't break trades after the fact.
During a crash, most HFT's should make money hand over fist. But if the market centers break trades, HFT's are in danger of stabilizing the market and being heavily penalized for it.
I.e., if an HFT pushes accenture up from $0.05 to $1.00 and sells at $35, following which accenture eventually goes up to $40, they run the risk of having their $1.00 buy trade broken. Then they are stuck with a short sale at $35, while the price of accenture went up to $40.